FASB Posts Options Rule

Current rules require companies that choose the intrinsic method to make a fair-value estimate of their options costs in the footnotes of their financial statements.

The new rule would eliminate the intrinsic method alternative. Instead, all companies would eventually have to recognize the fair-value cost of their options in their income statements.

Under the new rule, most public companies will have to recognize options costs beginning with their first quarterly or annual period that begins after June 15. Small public companies won't have to recognize options charges until their first quarterly or annual reporting period that begins after Dec. 15, 2005. And private companies won't have to start expensing options until their first fiscal year that begins after Dec. 15 of next year.

Though companies will no longer be able to choose whether to expense options, they will have some leeway in how to calculate their options costs. The new rule will allow companies to continue to use the Black-Scholes formula instead of the binomial method FASB initially favored.

Such formulas take into account variables such as the length of the option contract, the exercise price of the option and the expected volatility of the company's share price.

Some accounting watchdogs have raised concerns that companies may -- or have already started to -- tweak those variables to try to bring down their estimated options costs. FASB officials said on the conference call that the proposed rule gives detailed guidance on how to correctly apply the new accounting standard.

Many investors, corporate guardians and accounting experts have been pushing for years to require companies to expensing stock options. Many of them have blamed the sharp rise in executive pay over the last 15 years on the increased use of options, which has been encouraged by the way they are accounted for.